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Unformatted text preview: 1 Transfer pricing Linda Chang Lecturer [email protected] . Learning Objectives Explain the benefits and costs of decentralisation Explain the benefits of transfer pricing systems Understand the differences between different types of responsibility centres Determine transfer prices using various methods, including: LO1 LO2 LO3 LO4 methods, including: Market price Cost-plus price Negotiated transfer price In particular, the “general rule” of transfer price determination Understand the profitability implications of different transfer prices on divisional profits and the corporation’s profit as a whole LO5 Link to earlier topics Cost allocation Profitability analysis But accounting information can also be used to reflect “accountability” and responsibility 3 to reflect accountability and responsibility Technology Support Dept Accounting & Finance Dept Lecture Outline Decentralisation & Responsibility Accounting Transfer pricing Transfer pricing methods Transfer pricing methods General transfer pricing rule Application of rule in different scenarios 4 Decentralisation and responsibility accounting As an organisation grows in size, it becomes difficult to manage as a single unit Responsibility accounting is a performance measurement concept where a large 5 organisation is divided into “responsibility centres” Decentralisation and responsibility accounting Decentralisation The restructuring of the organisation into smaller sub-units, such as divisions and departments, each with specific operations and decision-making responsibilities 6 Responsibility accounting Assign responsibility to managers to run particular sub-units of the organisation Helps to reinforce the advantages of decentralisation Obtaining goal congruence helps ensure that decentralised organisations are effective Consistency between managers’ personal goals and the goals of the organisation 2 Benefits of Decentralisation Managers of sub-units have better local information about markets and operations to enable them to manage their areas more effectively Provides managerial training for future 7 higher-level managers May lead to greater motivation and job satisfaction for sub-unit managers Allows corporate managers more time for strategic issues Allows the organisation to react more quickly to opportunities and problems as they arise Costs of Decentralisation Negative consequences Managers may focus too narrowly on their own sub-unit’s performance rather than on attaining the organisation’s overall goals Some tasks and services may be duplicated 8 Some tasks and services may be duplicated unnecessarily Goal congruence: a behavioural challenge Goal congruence may be difficult to achieve in a decentralised organisation Performance measures and reward systems may provide direction and incentives to achieve wider organisational goals Responsibility centres...
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- Spring '11
- Pricing, transfer price